2021 year-end tax ideas
There is talk that the U.S. Congress may be looking to substantially increase tax revenues. Increases could possibility be effective retroactively to earlier in 2021, or they could start in 2022.
Things to consider:
- STOCKS selling marketable security investments before year-end to harvest losses from positions that have decreased in value, assuming that you have net taxable capital gains now.
- STOCKS selling long-term appreciated marketable security investments in 2021, rather than after the Biden Administration possibly passes higher long-term capital gains tax rates for 2022.
- STOCKS donating to registered 501(c)(3) charities your long-term appreciated marketable security investments before year-end, assuming that you itemize deductions before considering these additional donations.
- CRYPTOCURRENCY sold at a loss is not subject to the wash sale rule, therefore if you can sell your losses on Monday and buy the same cryptocurrency right back on Tuesday to lower your capital gains for 2021. Of course if you believe that your tax rate will be higher in 2022 this idea might not be one for you.
- ESTIMATED TAX make sure that you have at least 110% of your total 2020 tax amount withheld or paid into the IRS by 1/15/2022.
- ESTIMATED TAX make sure that you have at least 110% of your total 2020 tax amount withheld or paid into the state by 1/15/2022.
- BUYING depreciable property (rental real estate or your operating business). Do it before year-end. Sellers are more motivated to sell in 2021. Capital gains taxes are rumored to rise starting January 1, 2022. The sales price may rise in 2022 because your seller may owe more tax on the sale. It can be “win-win” if you may buy at a lower price in 2021 and you deduct depreciation starting in 2022 at higher tax rates.
- SELLING depreciable property Do it before year-end. Sales completed in 2021 can be taxed at lower 2021 capital gains rates. Miss this and any sale made after 2021 may be subject to higher capital gains rates as well as higher ordinary rates for any depreciation recapture.
Estimated tax payments may be due January 15, 2022, with the balance due April 15, 2022. - SALT paying estimated taxes before year-end if you itemize deductions and have not yet reached the $10,000 SALT limitation.
- SALT prepay state entity estimated taxes before December 31, 2021. Many states have a SALT limitation workaround where your partnership or S-corporation (including many LLCs) deduct state income taxes as a business expense and then pass along a tax credit to the owners to be used to pay their own personal state income taxes, thereby bypassing the $10,000 SALT limitation. Or to refund excess to the owners. In some states the entity must file an election before a state imposed filing deadline.The 2021 tax year election deadline for California is March 15, 2022. The 2022 tax year election deadline for California is deemed to be June 15, 2022. The 2022 tax year election deadline for New York is March 15, 2022. The 2021 tax year election deadline for New Jersey is March 15, 2022. Connecticut has no election, rather it is mandatory . In some states, the election is made on a timely filed (or delinquently filed) entity income tax return.
- GIFTS gifting away appreciated marketable security investments and other valuable assets now, rather than after the Biden Administration possibly lowers the lifetime gift tax exemption from $11,700,000.
- GIFTS making other additional charitable gifting now (but also consider holding off until 2022 when your tax rate might be even higher).
- GIFTS for those over age 70 or 72, rather than taking your annual RMD as taxable income, gift it to a registered 501(c)(3) charity as a Qualified Charitable Distribution (QCD).
- Permanently relocate your domicile to a tax-free state such as Florida or Texas.
- ROTH converting certain retirement plan funds into Roth IRAs if there is a strong belief that there will be significant future appreciation. i.e. for an example, if you are holding Tesla or Amazon and believe that they very well might double in value in a couple years, convert them into a Roth now.
- ROTH do a back-door Roth IRA contribution for 2021 and 2022. This entails a two step process. First, deposit your annual contribution into a traditional non-deductible IRA (which has no income limits). Then, immediately move that money into a Roth IRA using a Roth conversion. But make sure you completely understand the tax consequences before using this strategy. Caution: if you already have other traditional IRAs, this strategy could accelerate taxation of those IRA holdings.
- ROTH similar to the back door Roth IRA conversion, do a 401(k) In-Plan Roth conversion.
- ROTH do a mega back-door Roth IRA contribution for 2021 and 2022. This entails a multi-step process. First, find a provider who offers the type of multiple accounts that will accommodate this procedure. Then deposit your annual contribution and have your employer (your own business) deposit its annual contributions to the 401(k) and Profit Sharing plans. Then, immediately move that money into the Roth 401(k). But make sure you completely understand the highly complex tax consequences before using this strategy. Caution: if you already have other retirement accounts this strategy could accelerate taxation of any previous deferrals.
- VEHICLES self-employed businesses: sell or trade-in your old fully depreciated business use car and buy a new one, especially an SUV with a GVWR over 6,000 pounds used exclusively for the business. The sales price or trade-in value is fully taxable as ordinary income (not subject to self-employment tax). The purchase amount is depreciated as a deduction from earned income (lowering your self-employment tax).
- VEHICLES sell or trade-in your old partially depreciated business use car, especially pre-2018 vehicles acquired with a trade-in. The difference from the current value and the higher partially depreciated tax basis “book” value is a current tax deduction.